| In previous Newsletters, we provided you with definitions and examples of Long Option Straddles, and short option straddles. Today I want to show you the Short Option straddle with an always in the market futures position, this is a technique we use in a relatively new trading program we are offering called “AIM” Always In the Market.
The option strategy compliments futures contracts in Micro Crude oil, Micro E-mini Nasdaq, Micro E-mini S&P 500 and the U.S. 30 yr bond contract using a swing trading protocol for the futures and a short option straddle placed weekly.
Please contact your broker Please contact your broker, if you are a current client or call us to learn more about this opportunity.
Options Workshop 303:
By John Thorpe, Senior Broker
A short option straddle combined with an open futures position is basically a way to collect option premium while modifying the risk profile of your futures trade. The exact effect depends on whether your futures position is long or short.
A short straddle means you:
- Sell a call option
- Sell a put option
- Same futures contract (underlying), same strike price, same expiration
You receive premium upfront, but you take on the obligation:
- If futures rise a lot → the short call loses
- If futures fall a lot → the short put loses
- You benefit if futures stay near the strike
Example: You are already long futures
Suppose:
- Long 1 crude oil futures at $75
- Sell a $75 call for $2
- Sell a $75 put for $2
You collect $4 premium.
Your position is now:
Long futures + short straddle
If crude goes to $75 at expiration:
- Futures: $0 gain/loss
- Call expires worthless: +$2
- Put expires worthless: +$2
Total: +$4
This is the ideal outcome: the market stays flat.
If crude goes to $85:
- Futures: +$10
- Short call: -$10
- Short put: $0
- Premium: +$4
Net:
+$4
The short call caps some of your upside, because your long futures gain offsets the call loss.
If crude goes to $65:
- Futures: -$10
- Short put: -$10
- Short call: $0
- Premium: +$4
Net:
-$16
This is the danger: the short put adds downside exposure on top of your losing futures position.
So:
Long futures + short straddle = you are basically betting the market will stay stable, but you have extra downside risk.
If you are short futures
Now reverse it:
- Short futures
- Sell call
- Sell put
Example:
Short crude at $75, collect $4 premium.
At expiration:
Market at $75
- Futures: 0
- Options: +$4
- = +$4
Market at $65
- Futures: +$10
- Short put: -$10
- = +$4
Market at $85
- Futures: -$10
- Short call: -$10
- = -$16
So:
Short futures + short straddle = downside is somewhat protected by the short futures, but a big rally hurts badly.
Why would someone do this?
Common reasons:
-
Income generation
- Collect option premium
- Works if volatility collapses and futures stay range-bound
-
Turn a directional futures position into a range trade
- Long futures alone = bullish
- Long futures + short straddle = “bullish but expecting little movement”
-
Hedge existing futures exposure
- But it is not a traditional hedge because you are adding short option risk
The key risk
A short straddle has unlimited risk:
- Short call → unlimited loss if futures explode higher
- Short put → large loss if futures crash
The futures position can offset one side, but it usually makes the other side worse.
A useful way to think about it:
- Long futures + short straddle = short volatility + long price bias
- Short futures + short straddle = short volatility + short price bias
The trade is mostly a bet that futures will not move much before expiration.
Where “reverse the futures” comes in
A trader may manage this by saying:
“If the market moves strongly against me, I will reverse the futures position.”
Example:
Start:
- Long futures
- Short straddle
Market drops through 4,900.
You decide the move is real, so you:
- Sell your long futures
- Go short futures
Now you have:
- Short futures
- Short put
- Short call
Your delta has flipped.
If the market keeps falling:
Short futures gains may offset the short put losses.
Example:
Market continues from 4,900 → 4,700.
Short futures:
+200
Short put:
-300
Net:
-100
Instead of the original -300 futures loss + -300 put loss.
Why traders do this
This strategy is sometimes called:
- short straddle with futures adjustment
- delta hedging
- gamma scalping (if actively managed)
- short volatility trading
The idea:
- Sell expensive implied volatility
- Collect premium decay (theta)
- Adjust futures exposure as the market moves
You are betting:
“The market will not make a large move faster than I can adjust.”
The major risk
Short straddles have negative gamma:
- Small moves are manageable
- Big moves accelerate losses
The futures reversal helps, but timing matters. If the market gaps overnight, moves violently, or liquidity disappears, the adjustment may come too late.
A useful way to think about the position:
Market behavior
Result
Stays flat
Best outcome
Slowly trends
Manageable with futures adjustments
Violent move
Dangerous
Gap move
Highest risk
So, the futures position is not a “hedge” in the traditional sense — it is a dynamic directional adjustment tool that changes the straddle’s exposure as the market moves.
Cannon has a product that trades this strategy called AIM “Always in the Market” call us to learn more.
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